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Egypt parties edge toward economic policy consensus

For a political movement that has just triumphed in elections, winning nearly half the seats in Egypt's first parliamentary polls since last year's revolution, the Muslim Brotherhood is sounding remarkably flexible on economic policy.

The Islamist group promised voters it would improve the lives of the poor. But it is steering clear of radical proposals to redistribute wealth and stresses it will consult other parties in parliament. It is conducting a charm offensive among businessmen, declaring the stock market vital and pledging to respect private property and protect tourism, a big foreign exchange earner. Although the party frowns on alcohol and bikinis, it says it will not try to ban them in tourist areas.

"We will be part of a parliament," Ashraf Badr Eddin, head of the Brotherhood's economic policy committee, told Reuters last week. "We will work with the support of other parties."

A year after the ouster of President Hosni Mubarak, most of Egypt's main political parties are fumbling toward a consensus on managing the economy, as shrinking foreign reserves threaten a currency crisis and the government struggles to finance its budget deficit, paying over 15 percent on short-term bills.

It is a difficult, uncertain process, but a common approach is emerging: obtain aid from the International Monetary Fund (IMF) and other foreign donors; protect private business and financial markets; cut the budget deficit; and lend money to small and medium-sized enterprises to create jobs.

The consensus may come just in time to avert economic disaster.

"The new parliament will face some major challenges, not the least of which is to try to find a common program to induce confidence and help bring about economic stability," said Angus Blair, head of research at Egyptian investment bank Beltone Financial. "They need to take strong action on one or a few key issues to show they mean business."

Policy in limbo

Economic policy has been in limbo since Mubarak was overthrown. The military-backed governments which replaced him, lacking popular support and wary of triggering fresh unrest, have shied away from reforms. In June the military rejected a US$3 billion loan offer from the IMF, out of national pride and a reluctance to commit to conditions such as curbs on spending.

Investment by big local and foreign companies has largely ground to a halt because of uncertainty over the policies of the post-election government, which will be dominated by parties that were restricted or excluded from power by Mubarak.

With final results of the elections yet to be announced, the Brotherhood estimates it won 46 percent of seats in parliament's lower house, with the more hardline Islamist Salafi Nour Party taking some 23 percent and the rest won by a wide range of secular and liberal parties, independents and others.

Agreeing on policy in such a disparate parliament would be a challenge under any circumstances. But it is complicated by the fact the shape of the new political system is still not clear. The military says it will continue ruling until the end of June, by which time a new president will be elected, but constitutional issues such as the balance of power between the presidency and parliament have yet to be decided.

In recent weeks, however, there have been signs that parties are starting to horse-trade over policies.

The Brotherhood is floating specific proposals for tax changes and other reforms. Badr Eddin said the Brotherhood had been developing unofficial contacts with other parties, though it had not held formal talks with them on economic policy.

Hassan Abou Seada, shadow prime minister and finance minister of the Wafd Party, which may take nearly 10 percent of seats in the new parliament, said members of his party had held encouraging discussions with the Brotherhood on economics.

The liberal Wafd is descended from one of Egypt's oldest political parties and is favored by many businessmen.

"I can say from these discussions with the Brotherhood that they are very moderate, not extreme, and there was substantial agreement on ideas and policies," Abou Seada told Reuters.

IMF deal

The military-backed government resumed talks with the IMF this week on at least $3.2 billion of aid to help avert a balance of payments crisis. The Fund has said any deal must have "broad political support" in Egypt.

A deal would probably limit the freedom of politicians to spend, but no major party has come out against the talks. The Brotherhood says it may accept a deal if alternatives are first explored and if the aid comes without conditions a face-saving formula that could, for example, let Egypt offer the IMF policy assurances in a letter of intent rather than an ironclad loan agreement.

The major threat to the parties' pro-private sector consensus comes from the Nour Party, which says it does not oppose private investment or foreign capital but that "the state will determine vital sectors that need investment capital."

"The party's economic program focuses on achieving a balance between rich and poor. We are closer to the leftist stream in achieving social justice and taking care of the poor," party spokesman Youssry Hamad told Al-Masry Al-Youm newspaper.

Faced with an expected alliance in parliament between the Brotherhood and some liberal or independent MPs, though, Nour may get little chance to impose its views. It could lose public support if it is seen to be trying to block pro-growth policies.

Fiscal policy

Agreeing on how to cut the budget deficit will be tough. Although the Brotherhood and other parties agree on the need for savings, they have not reached a common position on specific steps, almost all of which would be politically risky for them.

The government estimates a deficit of 134 billion Egyptian pounds ($22 billion), or 8.6 percent of gross domestic product, in the year to June 30, 2012. Cutting that over several years to say 3 percent, as the European Union requires of its members, might need some 80 billion pounds of spending cuts or revenues.

Many parties are hoping to avoid difficult choices for now by taking short-term steps: for example, appropriating an estimated 35 billion pounds in fiscal reserves accumulated at ministries; having companies pay some of their taxes early; and deferring investment in infrastructure such as the Suez Canal.

More promising proposals include cutting military spending at least temporarily though that might risk tensions between the new government and the military and raising prices for Egypt's natural gas exports. Then-Prime Minister Essam Sharaf was quoted by the official MENA news agency as saying last year that gas price changes could bring Egypt an extra $3-4 billion in annual revenue, though this would depend on many factors.

The Brotherhood says it is also willing to consider reform of Egypt's hugely inefficient food and energy subsidies, perhaps by switching to direct cash payments for the poor. Food subsidies cost the government over 30 billion pounds annually.

However, as mass protests last week in Nigeria showed, changing subsidies can be politically disastrous. Badr El-Din said it would have to be done with broad cross-party support.

He told Al-Ahram newspaper that taxes on "commercial and rent-based sectors," presumably including real estate, might be raised to boost revenue; higher taxes on the telecommunications sector could provide "over 1 billion pounds."

The Brotherhood also favors a capital gains tax, although the tax would be low 3 percent on funds leaving the stock market after fewer than six months, with lower rates for long-term investors and there is little room to hike most taxes without hurting the economy. The Brotherhood will consider tax breaks for job-intensive sectors such as textiles.

Many parties say they aim to channel more government money to small and medium-sized businesses; a proposal by Al-Wafd to do this through a special government bank may win support.

The economy would also benefit from reforms such as more deregulation in some sectors and legal changes to help resolve tangled disputes over property rights. But they may have to wait as parliament will initially be preoccupied with the shorter-term challenge of keeping the economy and state finances afloat.

Sayem Ali, North Africa analyst at Standard Chartered Bank, said the new government would probably keep the free-market stance originally introduced by a reformist cabinet in 2004-05. Initially at least, he does not expect radical policy moves.

"In the early period the new government will be busy firefighting. To a large degree their hands will be tied."

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